promising more intrusive regulation and warning that people “should be frightened” of the FSA

TO BE NOTED: From Bloomberg:

"FSA Light Touch Turns to Iron Fist as Interviews Rise (Update1)

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By Caroline Binham

April 28 (Bloomberg) -- U.K. banks including Barclays Plc, HSBC Holdings Plc and Lloyds Banking Group Plc are having as many as four times more employees interviewed during routine inspections as the nation’s financial regulator’s “light touch” morphs into an iron fist.

As many as 150 people are being questioned by the Financial Services Authority during examinations at Britain’s biggest banks, according to lawyers and a person familiar with the visits. In previous years, the maximum for a major bank would have been 40 interviews, they say.

“The FSA is becoming nastier,” said Sara George, a former FSA prosecutor who is now a regulatory lawyer at Allen & Overy LLP. “There is a feeling that the FSA is now a lot more answerable to Westminster and to the taxpayer than to the City,” she said, referring to the home of Parliament, and London’s financial district.

The regulator, criticized by lawmakers for not doing enough to prevent the financial crisis, has broken with its past approach, promising more intrusive regulation and warning that people “should be frightened” of the FSA. It has pledged to become more involved in banks’ business, from scrutinizing strategy to influencing hiring and compensation.

The U.K. now owns stakes in Royal Bank of Scotland Group Plc and Lloyds, while Northern Rock Plc and Bradford & Bingley Plc have been nationalized. The International Monetary Fund last week estimated the total cost of bailing out British banks will be 175 billion pounds ($255 billion).

Brown Creation

Prime Minister Gordon Brown, who created the FSA in 1997 when he was Chancellor of the Exchequer, had up until the credit crisis championed London’s “light-touch” regulation for being business friendly.

“Where more people are interviewed, that is in line with our more intrusive approach,” said Heidi Ashley, an FSA spokeswoman.

FSA inspections are known as ARROW visits, which stands for “advanced, risk-responsive operating framework.” Before this year, they consisted of assessments of financial companies’ compliance and risk-management.

Over 100

“Whereas before an ARROW visit may have taken in 20 to 40 people, now it’s over 100,” said Carlos Conceicao, a former FSA enforcement director who’s now a regulatory lawyer at London- based Clifford Chance LLP.

The FSA interviewed about 80 people at one of Britain’s biggest banks in the final quarter of 2008, according to a person familiar with the visit. The bank was told that more than 100 will be interviewed next time, said the person, who declined to be identified because the inspections are confidential.

Non-executive directors are now being questioned more intensely and are being asked to provide evidence of where they disagreed with management and how they made their views known, said George at Allen & Overy.

“The FSA is doing two things,” said Jonathan McMahon, a former FSA bank supervisor who is now a regulatory adviser at the consulting firm Promontory Financial Group. “It’s asking more detailed, probing questions. It’s also interviewing people previously untouched by ARROW,” including more junior employees.

The FSA’s more intensive approach can also be seen in the time it takes to approve applications for roles of “significant influence” at companies, said Darren Fox, a regulatory lawyer at London-based Simmons & Simmons.

‘Far More’ Interviews

The regulator is undertaking “far more” interviews before signing off on such appointments, Sally Dewar, the FSA’s Director of Wholesale and Institutional Markets, said yesterday at a conference in London.

Overhauling the ARROW visits mirrors the “revolution” in regulation that its chairman, Adair Turner, promised last month.

ARROW “has embodied our principles-based approach, delivering a lighter regulatory touch for those firms that pose less risk,” an FSA paper said in 2006.

The light-touch approach was criticized by opposition Conservative Party lawmakers who have recommended that bank supervision be returned to the Bank of England should they win the next general election, which must be held by 2010. Turner, presenting his blueprint for regulation, said last month the era of light-touch regulation was dead.

Turner pledged that after a recruitment drive, as many as 20 supervisors will be assigned to each large bank to undertake more rigorous assessment.

More FSA Staff

“They’ve got 100-odd new supervisors and one of the great unknowns is how quickly they’ve been brought up to speed,” Conceicao said. “If they’re not the right caliber with the right experience, then you’ve got inexperienced people looking at vast amounts of information.”

The financial crisis has brought to light scams such as the $65 billion Ponzi scheme to which Bernard Madoff pleaded guilty on March 12. He faces as many as 150 years in jail for using money from new investors to pay off old ones.

“No one wants to be the one who misses the red flags of the next Ponzi scheme and so the FSA is adding a whole new layer of scrutiny,” said Simmons & Simmons’s Fox.

While the FSA is responding to politicians’ concerns by asking for more information, it could also be setting itself up for more problems, Fox said. “The more information the FSA asks for, the more risk they take that if something goes wrong, they will have missed it.”

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net"

Investment bankers had become the most powerful political lobby in the country

TO BE NOTED: From the FT:

"Labour’s affair with bankers is to blame for this sorry state

Published: April 24 2009 20:24 | Last updated: April 24 2009 20:24

In Wednesday’s Budget statement, Alistair Darling acknowledged that even on his optimistic assumptions a decade was needed to repair Britain’s public finances. The UK government’s reputation for economic competence was already in tatters; the chancellor of the exchequer has now laid it definitively to rest. How did the New Labour project end in such disaster?

The answers lie not in unpredictable global events but closer to home. The government failed to deal effectively with the reform of public services and conducted an indecent love affair with the financial services industry. These two apparently unrelated errors, allied with hubris, proved to be a fatal combination.

When Labour came to power in 1997, dissatisfaction with public services such as health, education and transport was widespread, and justified. For two decades not enough money had been spent, particularly on capital projects. This underspending had contributed to weak and demoralised management, reservations about which led to a fear that simply allocating more cash would provide poor value for money.

There were two possible directions of reform. One – it might be described as Blairite – decentralised management authority and financial responsibility. The other – it might be described as Brownian – tightened centralised control and imposed performance targets on managers, with associated sticks and carrots. Both approaches were pursued, inconsistently, but overall with more Brown than Blair. When, by 2000, there was little to show in the way of beneficial results, the decision was made to spend lots more anyway. There were some service improvements, but the concern that the extra money would not be well spent proved largely justified.

The reasons targets do not work are evident from any study of the failure of planned economies. You can require people to meet goals, but that is not at all the same as encouraging them to meet the objectives behind the goals. By emphasising targets you undermine both their motivation and their ability to achieve these more fundamental underlying goals. In a delicious irony, a major victim of this process would be the Treasury itself. Here is how it happened.

The government’s principal fiscal target was to balance current expenditures with revenues over an economic cycle. This makes sense as a generalised objective: but not as a binding constraint. The financial services sector boomed from 1998 to 2000 and the government benefited from a surge of revenues. The tide then receded. But by mechanically averaging spending and receipts over the cycle, earlier revenues could be used to offset the later splurge in spending. When this resource started to run out, the Treasury redefined the economic cycle to claim compliance with the target.

This is where the two stories become linked. We now know that many of the banking profits of that period were illusory. But they generated substantial revenues from corporation tax and income tax on bonuses. The real funding gap was wider even than it appeared.

But the illusion was at its most influential at the highest levels of government. Investment bankers had become the most powerful political lobby in the country and there was no vestige of political support for action to restrain City excess. Light touch regulation was not just a matter of policy but a matter of pride.

What would have happened if the Financial Services Authority or Bank of England had sought to block the competing bids from RBS and Barclays for ABN Amro – a contest which, we now know, would bankrupt the bank that won the race? The phones in Downing Street would have been ringing insistently and it is easy to imagine the government’s response.

Little has changed. The government continues to see financial services through the eyes of the financial services industry, for which the priority is to restore business as usual. For a time in 2008, it seemed possible to argue that a package of temporary support for the banking industry, combined with substantial recapitalisation of the weaker players, might stabilise the financial sector and prevent serious knock-on effects.

But the problems of banks are much deeper than were then acknowledged and the destabilisation of the real economy has happened anyway. Government now provides taxpayers’ money to financial services businesses in previously unimaginable quantities. But there is no control over the use of the money, no insistence on structural reform or management reorganisation, no safeguarding of the essential economic functions of the financial services industry and no accountability for the damage that has been done.

It is as though the teenage children and their friends were to wreck the house and then demand that the grown-ups clean up before the next party. Their parents are too intimidated to do anything more than ask Uncle Adair to keep an eye on them and excoriate the hapless Fred who made off with some of the silver.

On Wednesday, Mr Darling gave the impression of an honest man who would have much preferred to have been somewhere else, as befits someone caught in a trap not of his own devising. We need a comprehensive reappraisal of both the fiscal framework and the economic and political role of the financial services sector. The crippling consequence of inability to admit error is the impossibility of learning from past mistakes.

johnkay@johnkay.com"